Impact of inflation: how the military may need to adjust spending to meet rising production costs

Impact of inflation: how the military may need to adjust spending to meet rising production costs

Rising production costs due to inflation will impact the military’s purchasing power as it seeks to honor outstanding contracts for planes, ships and other vehicles.

“There’s an impact on military hardware up and down the chain at every level,” Pete Phillips, a former Navy pilot, told FOX Business. “You are facing the same delays or cost increases that have impacted the civilian side of the house.”

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Inflation has continued to climb in recent months, approaching its highest level in 40 years, as the Russian invasion of Ukraine and strong consumer demand continue to drive up consumer prices. The consumer price index, a broad measure of the price of everyday goods, rose 8.3% in April from a year ago.

These price increases affect products of all kinds, from technology to gas and everything in between, and a number of shortages of products such as microchips and infant formula have helped keep these prices high.

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And the military is not immune: the fighter jets and submarines deployed by US forces may be complex, but the parts they use are fairly common, even though they go through a process of more rigorous testing.

“A lot of the things you use in the military are, for all intents and purposes, off-the-shelf commercial items that we put on our military vehicles,” Phillips explained. “The tires they make for a Humvee are made in the same plant where we build Goodyear tires for a Ford F-150 – the same with the brakes and other ancillary parts.”

“Just because you make military radio doesn’t mean you use special parts,” he added. “Yeah, they have to be made to build spec, but you use the same innards.”

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Inflation may not have immediate impacts as projects often take years to complete. The acquisition of some Navy ships takes up to a decade, which means that projects already underway will proceed as planned.

Usually, contracts for these vehicles will include provisions to cover increased production costs, giving the government the flexibility to renegotiate in some cases or change targets and prevent contractors from suffering too much.

But the legal requirement to enter into those contracts will likely limit what the military can spend on future projects, according to Phillips. If the military could offer a $500 million contract for five F-15EXs, the cost of inflation might reduce that number to three jets instead for the same overall cost to cover the higher procurement cost. .

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“You’re going to see either an increase in the defense budget or a reduction in the number of things we’re buying,” Phillips said, explaining that the Navy may be decommissioning some relatively young ships to make way for new ships due the cost of maintaining the fleet.

“You may have to retire if you wanted to keep 100, you may have to retire at 25 because the budget is the same so you can’t maintain 100,” he added. “You can only maintain 75 but the same budget. These are things you will see.”

Megan Henney of FOX Business contributed to this report.

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